Indices start to reprice risk ahead of the Fed’s rate announcement

Indices were choppy at mid-day, with Tech and Small caps ahead and Regional Banks off again. New highs for the gold price, the VIX, Wall Street’s fear index, trekking back up from recent lows, and lower bond yields, all point to a gradual repricing or risk in financial markets. Economic data was surprisingly strong, notably inflation components.

Powell speaks, traders look for the next move in rates

The Fed's policy decision statement is due to be released at 2:00 PM Eastern, with Fed Chair Jerome Powell's closely watched press conference scheduled for 30 minutes after. Traders will be looking for any indications of the Fed's plan going forward, hoping for a pivot to rate cuts before the end of 2023 despite the Fed's continued insistence that they will not repeat mistakes of the past by cutting rates too soon in the face of continuing inflation risks.

Regional Bank prices off

First Republic Bank's failure has continued to weigh on regional bank stocks this week, with PacWest and Comerica among notable names posting double digit percentage losses yesterday. Regional banking indexes have fallen sharply in 2023, with the KBW Regional Banking Index down nearly 30% from the start of the year and reaching its lowest level since late 2020. While many in the banking sector have attempted to provide assurances that the worst is over, stock price movements point to continuing uncertainty for mid-sized banks.

Global business growth still strong, but inflation still lingers

After business activity indicators dipped into contractionary territory for seven consecutive months starting in July 2022, we've now seen three consecutive months in expansionary territory so far in 2023.  Growth was firmer than expected in manufacturing and service sectors, with employment also growing at its fastest rate since July 2022, following this morning's stronger US economic data including better-than-expected ADP number. Despite the positivity, one potential sign of concern was an uptick in the prices paid for inputs portion, perhaps a sign of lingering inflation.

Indices rally, bonds rally, VIX rises

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were flat, up by 03% and up by 1.7%, respectively, with the latter pointing to a rebound smaller and more cyclical stocks
• The VIX, Wall Street’s fear index, traded 18.0,confirming the recent repricing of risk
• The dollar index fell back by 0.5% to 102, with Sterling and the Euro ahead by 0.7% and 0.4%, respectively
• Yields on 2- and 10-year Treasuries fell a little more to 3.95% and 3.38%, respectively(bonds love recession fears)

Gold rallies to new highs, oil sells off below technical supports

• Gold prices rallied further to $2,032 per ounce mark, up by 0.5%, and another 3-year high
• Crude oil prices were the main talking point, falling 4.0% to $68. per barrel
• Agricultural commodities were mixed, though the wheat complex is rebounding after its recent slide

Global and US business indications still point to strength, lingering inflation risks

• Private sector business activity grew in April at its fastest pace since May 2022, with this morning's S&P Global Composite Purchasing Managers Index (PMI) coming in at 53.4, only falling slightly from its preliminary 53.5 reading despite expectations of a sharper decline
• The Composite PMI tracks overall private sector business conditions – sales, new orders, employment, prices paid/received, etc. – from the manufacturing and service sectors (readings above 50, like today's, indicating expansion and readings below 50 indicating contraction)
• The US service sector showed overall growth in April, with this morning's Institute for Supply Management (ISM) Services PMI climbing to 51.9 in April, slightly above analyst estimates of a 51.8 reading, and up from the 51.2 seen in March
• This was driven largely by a sharp increase in new orders as well as the best supplier delivery performance seen since December 2015
• However, headline number's positivity hides some negativity in the detail. The Business Activity portion of the index fell to 52 in April, well below forecasts of a 54.5 reading, a sharp drop from the month prior's 55.4 and marks the lowest reading seen since May 2020
• The Prices Paid portion of the index rose slightly from March, the first increase seen since mid-2022, again an inflation warning

Strong US labor market data

• The US labor market showed unexpected strength on this morning's ADP National Employment Report, reversing course from recent signs of softening and giving the market fresh jobs data to digest until Friday’s Nonfarm Payrolls report
• Private businesses created 296,00 jobs in April, doubling the forecasted number of 148,00 and the strongest monthly employment gain since July 2022
• The service sector led the push higher, adding 229,000 of the jobs added, with the majority in leisure & hospitality
• The goods-producing sector added 67,00 jobs overall, with gains in construction and mining
• The financial sector cut 28,000 jobs in the month of April, adding to the lingering fears following the string of recent bank failures

Mortgage applications fell, confirming colling housing market

• The Mortgage Bankers Association’s (MBA) Market Index of mortgage applications fell just under 40% year-on-year as the housing sector continues to cool from its red hot post-pandemic run
• US mortgage applications fell 1.2% in the week ending April 28, according to this morning's MBA report
• The MBA purchase index fell 2% week-on-week while refinance applications rose 0.8% with 30-year fixed rates dropping 5 basis points to 6.5%

Putin assassination attempt?

• Multiple media outlets are reporting a potential assassination attempt on Russian President Vladimir Putin overnight, as footage of a drone exploding over the Kremlin circulates on social media
• Sceptics smell a false flag operation, noting that it's very surprising that a drone could have made it that close to the Kremlin
• Russian officials immediately blamed the attempt on Ukraine, who denied any involvement and suggests the attack must have come from within Russia, as dissent in the country has grown considerably since it launched its invasion over a year ago
• In response, the Russian government said they "reserve the right to take retaliatory measures"
• Ukrainian grain is again cut off from the global market as it was early in the war and this could be one of the causes of the rally we're seeing in the wheat market today

Iran seizes another tanker

• Iran seized another oil tanker in the Strait of Hormuz today, its second in less than a week
• A considerable percentage of the world's crude oil and products pass through this choke point between Iran and Oman and it has continued to be a point of contention, especially with global geopolitical tensions continuing to rise
• Talks between the US and Iran over their nuclear program have stalled and Iran continues to supply drones to Russia for their long distance strikes in Ukraine
• While the market seems to be shrugging off this morning's news with recession fears weighing on demand expectations for oil, this serves as another reminder of the risks to global commodity flows during these times of ever-increasing tensions

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com